ACG 2021 Paterson FSU Ch.3 Quiz
In its first month of operations, a company's cash account has total debit entries amounting to $27,500 and total credit entries amounting to $24,900. At the end of the month, the cash account has a
$2,600 debit balance Solution: *When a company begins, all of its accounts have a zero balance.* This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. *Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances.* The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).
The effects of paying a dividend on the basic accounting equation are to
decrease assets and decrease stockholders' equity Solution: Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying a dividend decreases cash (i.e., decreases assets) and decreases retained earnings which is an equity account. Thus, asset decrease and equity decreases.
Retained earnings is decreased by - expenses - contribution from owners - cash payments for assets - cash payments - revenues
expenses Solution: Retained earnings is net income that a company retains in the business. It includes net income since the inception of the business—not just the current year's net income. Retained earnings is increased by net income (which is increased by revenues and decreased by expenses) and decreased by distributions to owners (such as dividends). The costs that a firm incurs when operating its business (i.e., its expenses) cause retained earnings to decrease.
The performance of services for cash
increases the performer's assets and stockholders' equity *Performing services for cash indicates that assets increased (i.e., cash increased) and revenue increased.* Revenue is recognized when it is earned. Increasing revenue increases net income and retained earnings. Retained earnings is a stockholders' equity account, so *stockholders' equity increases when revenue is earned.*
What type of account is unearned revenue?
liability Solution: The unearned revenue account is classified as a liability. Unearned revenues are payments for future services to be performed or goods to be delivered. Until a company performs the services or delivers the goods, the amount is owed to the party that made the payment.
Accounts are listed on the trial balance in
the order that they appear in the ledger. Solution: Accounts will appear in the trial balance in the same order that they appear in the ledger. While the journals are in chronological order, the trial balance is in the order of the accounts as they appear in the ledger. Alphabetical order is seldom justified in financial presentations. The journal entries are posted to the ledger sequentially.
If a transaction affected two accounts and total equity increased by $4,000, then
total assets must have increased by $4,000 or total liabilities must have decreased by $4,000. Solution: Assets = Liabilities + Equity The accounting equation must always be in balance. Every transaction has two effects on the accounting equation. If total equity increased by $4,000 and the transaction affected only two accounts, then either (i) total assets increased by $4,000 or (ii) total liabilities decreased by $4,000.
Posting
transfers journal entries to ledger accounts. Solution: Companies journalize transactions. Each journal entry summarizes a certain transaction or adjusting entry. Next, companies post the journal entries to the ledger. The procedure of transferring journal entry amounts to the ledger accounts is called posting. Posting is a required step in the recording process. If it is not done, the ledger's account balances will not be correct.
Wilson Company has the following accounts and account balances at the end of its first year: Accounts payable, $4,000 Cash, $22,000 Common stock, ? Dividends, $4,000 Expenses, $17,000 Notes payable, $3,000 Prepaid insurance, $5,000 Revenues, $28,000 What is the balance of its common stock account at the end of the first year?
$13,000 Solution: The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows: Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 22,000 + 5,000 = 27,000). Wilson's liabilities include accounts payable and notes payable (i.e., 4,000 + 3,000 = 7,000). This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases y net income and it decreases by dividends. Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends (i.e., 0 + 28,000 - 17,000 - 4,000 = 7,000). Assets = liabilities + retained earnings + common stock Common stock = Assets - liabilities - retained earnings Common stock = 27,000 - 7,000 - 7,000 Common stock = 13,000
During its first year of operations, Anne's Bakery had revenues of $65,000 and expenses of $33,000. At year-end, it borrowed $8,000 by issuing a note and paid cash dividends of $18,000. What is the balance in retained earnings at year-end?
$14,000 credit Solution: *Ending retained earnings = Beginning retained earnings + Revenues - Expenses - Dividends* Ending retained earnings = $0 + 65,000 - 33,000 - 18,000 = $14,000 Note: This is the company's first-year so its beginning retained earnings is zero. Retained earnings is an equity account; it normally has a credit balance. *Certain transactions do not affect retained earnings, such as borrowing money by issuing a note and purchasing equipment.*
At the start of the month, Acme Enterprises reported a $34,000 debit balance in its cash account. During the month, Acme collected cash of $30,000 and made disbursements of $42,000. At the end of the month, the cash balance is
$22,000 debit Solution: The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.
At the start of the month, Acme Enterprises reported a $34,000 debit balance in its cash account. During the month, Acme collected cash of $30,000 and made disbursements of $42,000. At the end of the month, the cash balance is
$22,000 debit Solution: *The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period.* The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.
What journal entry is recorded as a result of issuing a note when borrowing money from a bank?
A debit to Cash and a credit to Notes Payable Solution: Issuing a note when borrowing money from a bank requires the company to record a liability called Notes Payable. The company also receives the cash from the bank so the balance in cash increases.
Which of the following events is not recorded in a company's accounting records?
A decision to offer a company's services in a new geographic area. Solution: All of these events are transactions that affect the company's financial statements with one exception. A decision to offer a company's products or services in a new geographic area is not a recordable event in the company's accounting records. Future revenues and expenses may be affected by the decision, but those items will be recorded in the future as they occur.
Carpenter Company issues a note payable in exchange for cash. This transaction will immediately affect the
balance sheet and cash flows statement only Solution: When issuing a note payable in exchange for cash, the company issuing the note collects cash (which increases its assets) and increases the liabilities. Collecting cash also appears on the cash flows statement. Issuing a note payable does not affect income statement accounts (e.g., revenues and expenses). Issuing a note also does not affect retained earnings.
The basic form of a journal entry has the
debit account entered first at the extreme left margin Solution: *Journal entries have the following features:* *1. The date of the transaction* *2. The account to be debited is listed first and flush left. The account credits is listed beneath the account debited and indented.* *3. The amount debited and the amount credited recorded in the debit and credit columns, respectively.* *4. A brief explanation of the transaction may accompany it.* *Note that the journal never reports the accounts' balances. Only the ledger reports the accounts' balances.*
If a company records wages when it pays them, then recording the payment of wages
decrease assets and decrease stockholders' equity Solution: When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity).
The effects of issuing a note payable in exchange for cash on the basic accounting equation are to
increase assets and increase liabilities Solution: Basic accounting equation: Assets = Liabilities + Stockholders' Equity *issuing a note payable for cash increases cash (which is an asset) and increases notes payable (which is a liability).* Thus, assets increase and liabilities increase.
The effects of performing services for cash on the basic accounting equation are to
increase assets and increase stockholders' equity Solution: Basic accounting equation: Assets = Liabilities + Stockholders' Equity *When services are performed for cash, the company records the transaction as an increase in cash (which is an asset) and an increase in revenue, and increases in revenue increase retained earnings which is an equity account.* Thus, assets and stockholders' equity both increase.
If a previously unrecorded expense is recorded when it is paid with cash recording the the transaction will
increase expenses and decrease assets Solution: *When an expense is paid with cash, cash (i.e., assets) will be decreased and expenses will be increased.* Increasing expenses will reduce net income which reduces retained earnings. Liabilities will not be affected. For example, when a company pays a previously unrecorded insurance bill, it will decrease cash and increase its "insurance expense."
Norman Company had a transaction that decreased its assets by $5,000 and increased its assets by $5,000 with a net effect of no change in its assets. This transaction could have been a(n)
payment for a one-year insurance policy that will expire next year. Solution: The basic accounting equation is Assets = Liabilities + Equity; it must always balance. A $5,000 increase in assets combined with a $5,000 decrease in assets keeps the accounting equation in balance. Paying for insurance one-year in advance increases assets (i.e., prepaid insurance) and decreases assets (i.e., cash). The net effect is no change in total assets.
Norman Company had a transaction that increased its assets by $5,000 and increased its liabilities by $5,000. This transaction could have been a(n)
purchase of supplies for an account Solution The basic accounting equation is Assets = Liabilities + Equity; it must always balance. A $5,000 increase in assets combined with a $5,000 increase in liabilities keeps the accounting equation in balance. Purchasing assets, such as supplies, increases assets and purchasing "on account" increases liabilities.
If a previously unrecorded expense is recorded when it is paid with cash recording the the transaction will
increase expenses and decrease assets Solution: When an expense is paid with cash, cash (i.e., assets) will be decreased and expenses will be increased. Increasing expenses will reduce net income which reduces retained earnings. Liabilities will not be affected. For example, when a company pays a previously unrecorded insurance bill, it will decrease cash and increase its "insurance expense."
A trial balance
is a list of accounts with their balances at a given time. Solution: A trial balance is a list of accounts with their balances at a given time. While the trial balance does prove that debits and credits are equal after posting, it does not prove the mathematical accuracy of all journalized transactions. If a journal entry is posted twice, the trial balance will still balance. A trial balance does not prove that all transactions have been recorded.
Which of these step occurs earliest in the recording process? - Prepare a trial balance - Journalize the transaction - Prepare financial statements - Prepare the closing entries - Post to a journal `
journalize the transaction Solution: The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. This begins with examining a source document that provides evidence of a transaction or event that needs to be recorded. Examples of source documents include a bill or invoice, a cash register document, and a sales slip. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger).
Immediately after transaction information has been recorded in the journal, it should be recorded in the
ledger Solution: The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. This begins with examining a source document that provides evidence of a transaction or event that needs to be recorded. Examples of source documents include a bill or invoice, a cash register document, and a sales slip. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger).
Which of the following statements is false? - Liabilities increase with debits. - Common Stock increases with a credit. - Dividends have a normal debit balance. - Expenses have normal debit balances. - Revenue accounts are increased with credits.
liabilities increase with debits Solution: The normal balance of any account is the side which increases that account. *Debits increase assets, expenses, and dividends. Credits increase liabilities, equities, and revenues.*
If cash is received in advance from a customer
liabilities will increase and assets will increase Solution: Receiving cash in advance means that the *business receives cash from a customer before the company provides the merchandise or services being sold to the customer. This creates an obligation or a liability to the company. We call this liability "unearned revenue."* Liabilities increase and assets (i.e., cash) increase.
If cash is received in advance from a customer
liabilities will increase and assets will increase Solution: Receiving cash in advance means that the business receives cash from a customer before the company provides the merchandise or services being sold to the customer. This creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.
At the start of the month, Hawaii Inc. reported retained earnings of $136,000. During the month, Hawaii generated revenues of $20,000, incurred expenses of $12,000, purchased equipment for $5,000 and paid dividends of $2,000. What is the balance in retained earnings at the end of the month?
$142,000 credit Solution: *Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period.* Ending retained earnings = $136,000 + $20,000 - 12,000 − 2,000 = $142,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. *Note: Purchasing equipment increased equipment (i.e., assets) and either decreased cash (i.e., assets) or increased notes payable (i.e., liabilities); purchasing equipment did not affect net income or retained earnings.*
Jamol Company began the year with $52,000 in its Common Stock account and a credit balance in Retained Earnings of $37,000. During the year, the company earned net income of $46,000 and declared and paid $4,000 of dividends. In addition, the company sold additional common stock amounting to $25,000. Based on this information, what is the ending total of stockholders' equity?
$156,000 Solution: $156,000 = common stock + retained earnings = (52,000 + 25,000) + (37,000 + 46,000 - 4,000)
Jakes Company began the year with $84,000 in its Common Stock account and a credit balance in Retained Earnings of $36,000. During the year, the company earned net income of $24,000 and declared and paid $6,000 of dividends. In addition, the company sold additional common stock amounting to $22,000. What is the ending total stockholders' equity?
$160,000 Solution: *Ending contribution capital = Beginning contributed capital + additional stock issued* Ending contributed capital = 84,000 + 22,000 = 106,000 *Ending retained earnings = Beginning retained earnings + net income - dividends* Ending retained earnings = 36,000 + 24,000 - 6,000 = 54,000 *Total equity = contributed capital + retained earnings* Total equity = 106,000 + 54,000 = 160,000
At the start of the month, Hawaii Inc. reported retained earnings of $154,000. During the month, Hawaii generated revenues of $35,000, incurred expenses of $20,000, received $25,000 of cash from stockholders in exchange for additional common stock, and paid dividends of $3,000. What is the balance in retained earnings at the end of the month?
$166,000 credit Solution: Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $154,000 + $35,000 - 20,000 − 3,000 = $166,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: selling (i.e., issuing) additional common stock to shareholders in exchange for cash increases stockholders' equity and assets; it does not affect net income or retained earnings.
At January 1, Tyler Industries' retained earnings account had a credit balance of $280,000. During the year, Tyler Industries had a net loss of $60,000 and paid dividends to the stockholders of $40,000. It also borrowed $8,000 by issuing a note. At December 31, the balance in retained earnings is
$180,000 credit Solution: Ending retained earnings = Beginning retained earnings + Net income - Dividends Ending retained earnings = $280,000 - 60,000 - 40,000 = $180,000 Retained earnings is an equity account; it normally has a credit balance. Certain transactions do not affect retained earnings, such as borrowing money by issuing a note.
Barnes Company's financial records report the following accounts and balances at the end of the year: Accounts Payable..................... $ 3,200 Accounts Receivable................. 3,900 Cash............................................. 13,300 Common Stock........................... 4,800 Dividends.................................... 1,400 Interest expense........................ 17,700 Notes Payable............................ 4,400 Prepaid Insurance....................... 1,900 Retained earnings....................... 1,600 Service revenue....................... 24,200 What would the company show as its total credits on its trial balance?
$38,200 Solution: Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $38,200 (i.e., 3,900 + 13,300 + 1,400 + 1,900 + 17,700 = 38,200). Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $38,200 (i.e., 3,200 + 4,800 + 4,400 + 1,600 + 24,200 = 38,200). Note: total debits equal total credits.
Crawford Company started the year with $65,000 in its Common Stock account and a credit balance in Retained Earnings of $30,000. During the year, the company earned net income of $15,000 and declared and paid $5,000 of dividends. In addition, the company sold additional common stock amounting to $15,000. As a result, the amount of its retained earnings at the end of the year would be
$40,000 Solution: $40,000 = Beginning Retained Earnings + Net Income - Dividends = 30,000 + 15,000 - 5,000
Barnes Company's financial records report the following accounts and balances at the end of the year: Accounts Payable..................... $ 4,000 Accounts Receivable................. 5,000 Cash............................................. 14,000 Common Stock........................... 5,800 Dividends.................................... 2,500 Interest expense........................ 18,700 Notes Payable............................ 5,400 Prepaid Insurance....................... 3,000 Retained earnings....................... 3,200 Service revenue....................... 25,200 What would the company show as its total credits on its trial balance?
$43,600 Solution: Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its *assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends.* These sum to $43,600 (i.e., 5,000 + 14,400 + 2,500 + 3,000 + 18,700 = 43,600). Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its *liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue)*. These sum to $43,600 (i.e., 4,000 + 5,800 + 5,400 + 3,200 + 25,200 = 43,600). *Note: total debits equal total credits.al debits equal total credits.*
Barnes Company's financial records report the following accounts and balances at the end of the year: Accounts Payable..................... $ 4,300 Accounts Receivable................. 5,000 Cash............................................. 14,400 Common Stock........................... 5,900 Dividends.................................... 2,500 Interest expense........................ 18,800 Notes Payable............................ 5,500 Prepaid Insurance....................... 3,000 Retained earnings....................... 2,700 Service revenue....................... 25,300 What would the company show as its total credits on its trial balance?
$43,700 Solution: Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $43,700 (i.e., 5,000 + 14,400 + 2,500 + 3,000 + 18,800 = 43,700). Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $43,700 (i.e., 4,300 + 5,900 + 5,500 + 2,700 + 25,300 = 43,700). Note: total debits equal total credits.
Wilson Company has the following accounts and account balances at the end of its first year: Accounts payable, $4,000 Cash, $20,000 Common stock, ? Dividends, $1,000 Expenses, $17,000 Notes payable, $6,000 Prepaid insurance, $2,000 Revenues, $22,000 What is the balance of its common stock account at the end of the first year?
$8,000 Solution: The basic accounting equation (i.e., *Assets = Liabilities + Equity*) must stay in balance. The accounting equation can be expanded as follows: *Assets = Liabilities + Common stock + Retained earnings* Wilson's *assets include cash and prepaid insurance* (i.e., 20,000 + 2,000 = 22,000). Wilson's *liabilities include accounts payable and notes payable* (i.e., 4,000 + 6,000 = 10,000). This is Wilson Company's first year. Its *retained earnings at the start of the first year is zero.* Retained earnings increases by net income and it decreases by dividends. Wilson's *retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends *(i.e., 0 + 22,000 - 17,000 - 1,000 = 4,000). *Assets = liabilities + retained earnings + common stock* *Common stock = Assets - liabilities - retained earnings* Common stock = 22,000 - 10,000 - 4,000 Common stock = 8,000
Wilson Company has the following accounts and account balances at the end of its first year: Accounts payable, $1,000 Cash, $15,000 Common stock, ? Dividends, $2,000 Expenses, $15,000 Notes payable, $4,000 Prepaid insurance, $2,000 Revenues, $20,000 What is the balance of its common stock account at the end of the first year?
$9,000 Solution: The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows: Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 15,000 + 2,000 = 17,000). Wilson's liabilities include accounts payable and notes payable (i.e., 1,000 + 4,000 = 5,000). This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases by net income and it decreases by dividends. *Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current year net income minus current year dividends* (i.e., 0 + 20,000 - 15,000 - 2,000 = 3,000). Assets = liabilities + retained earnings + common stock *Common stock = Assets - liabilities - retained earnings* Common stock = 17,000 - 5,000 - 3,000 Common stock = 9,000
A trial balance would only help in detecting which one of the following errors?
An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly. Solution: A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.
Which pair of accounts follows the rules of debits and credits in relation to increases and decreases in the same manner?
Cash and Income Tax Expense Solution: Assets, expenses, and dividends are increased by debits. Liabilities equities, and revenues are increased with credits. Cash is an asset account, and salaries expense is an expense account; both are increased by debits. Note that Accumulated Depreciation—Equipment is reported among assets but the company reports the asset (such as equipment) less accumulated depreciation. In this sense, accumulated depreciation accounts are the opposite of assets and accumulated depreciation accounts are decreased by debits.
A trial balance would only help in detecting which one of the following errors?
For a given transaction, the account that should have been debited was debited but no account was credited Solution: A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. *A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. *For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.
Which of the following is the sequence of events for the recording process?
Journalize; post; prepare a trial balance Solution: The recording process does steps in a certain order. The first step is to analyze each transaction in terms of its effects on the accounts. The second step is to enter the transaction information in the journal (i.e., journalize the transaction). Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger). Fourth, the company prepares a trial balance to confirm the equality of debits and credits. Other steps follow and are described in the next chapter. Collectively, these steps are sometimes called "the accounting cycle."
On March 1, Freidman Company hires a new employee who will start to work on March 6. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not?
No, hiring an employee is an important event; however it is not an economic event that should be recorded. Solution: Paying the employees a wage decreases cash (i.e., decreases assets) and increases wages expense and an increase in expenses decreases retained earnings which is an equity account. However, *merely hiring an employee indicates that the employee has not yet performed any services for the company and has eared no wage.* Certain events, such as hiring an employee, are not transactions.
Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not?
No, revenue cannot be recognized until the work is performed. Solution: When collecting cash in advance from customers, the company receives cash (which increases its assets) and increases its liabilities (the liability account is called unearned revenues). The company does not recognize revenue as earned until it performs its obligation to the customer. Thus, assets increase and liabilities increase by the same amount when an advance from a customer is collected. Later, the company performs its obligation and the company then reduces the liability and recognizes revenue as earned.
A trial balance will not balance if
a $50 cash dividend was debited to Dividends for $500 and credited to cash for $50. Solution: A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.
During its first year of operations, Acme Company had revenues of $135,000 and expenses of $87,000. The business also paid cash dividends of $10,000 and purchased $25,000 of equipment in exchange for cash during the first year. What is the balance in the company's retained earnings account at the end of its first year?
a credit balance of $38,000 Ending retained earnings = Beginning retained earnings + net income - dividends. Other transactions, such as purchased of equipment, are ignored. Ending retained earnings = $0 + $135,000 - $87,000 - $10,000 = $38,000. Retained earnings normally has a credit balance; it occurs when revenues exceed expenses and dividends.
On January 14, Decker industries purchased supplies of $500 on account. The entry to record the purchase will include
a debit to Supplies and a credit to Accounts Payable. Solution: A purchased supplies of $500 on account would be recorded as an increase in supplies and an increase in accounts payable. Debit the supplies account by $500 and credit accounts payable by $500.
An account is a part of a company's financial information system and is described by all except which one of the following? - The credit side is the right side of the account's T-account. - An account has a debit and credit side. - An account consists of three parts with one part being the account's title. - The debit side is the left side of the account's T-account. - An account is a source document.
an account is a source document Solution: An account has three basic parts: (1) a title (such as "Cash" or Accounts Payable"), (2) a debit side (i.e., left-side column for recording account balance changes), and (3) a credit side (i.e., a right-side column for recording account balance changes). *Source documents are the information sources used to record changes to account balances (e.g., invoices are source documents). Accounts are not source document.*
An account is a part of a company's financial information system and is described by all except which one of the following?
an account is a source document Solution: An account has three basic parts: (1) a title (such as "Cash" or Accounts Payable"), (2) a debit side (i.e., left-side column for recording account balance changes), and (3) a credit side (i.e., a right-side column for recording account balance changes). Source documents are the information sources used to record changes to account balances (e.g., invoices are source documents). Accounts are not source document.
Which of the following events is not recorded in a company's accounting records? - a company provides services to a customer for cash - equipment is purchased on account - a cash investment is made into the business - the owner withdraws cash for personal use - an employee is terminated
an employee is terminated Solution: All of these events are transactions that affect the company's financial statements with one exception. Termination of an employee is not a recordable event in the accounting records. In the future, the company will have a lower salaries expense, but *terminating one or more employees is not an event recorded among a company's accounts.*
If services are performed in exchange for cash, then the service provider's
assets and equity will increase *Performing services for cash indicates that assets increased (i.e., cash increased)* and revenue increased. Revenue is recognized when it is earned. Increasing revenue increases net income and retained earnings. *Retained earnings is a stockholders' equity account, so stockholders' equity increases when revenue is earned.*
If a company buys supplies on account, then
assets increase and liabilities increase Solution: Buying supplies indicates that supplies are acquired, and *supplies are assets so assets increase.* Buying "on account" indicates that cash has not been paid. Rather, *a liability is created for the amount owed.* This transaction *increases an asset (i.e., supplies) and increases a liability (i.e., accounts payable).* Stockholders' equity is not affected.
If a company borrows money from a bank, then
assets increase and liabilities increase Solution: Issuing a note means that the company is borrowing money and signing a note payable as evidence of the loan. When a company borrows money by issuing a note, it receives cash but it also creates an obligation or a liability. This, assets increase because cash increases, and liabilities increase because notes payable increases.
Customarily, a trial balance is prepared
at the end of an accounting period Solution: A trial balance lists accounts and their balances at a given point in time. Accounts are listed in the same order that they appear in the ledger, including assets, liabilities, equities, dividends, revenues, and expenses. Account balances appear in either of two columns. The left-side column reports the debit balances and the right side column reports the credit balance. *A company prepares a trial balance at the end of the accounting period and before it prepares its financial statements. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances.*
Carpenter Company buys supplies on account. This transaction will immediately affect the
balance sheet only Solution: When buying equipment, the buyer acquires the equipment (which is an asset). Therefore, assets increase. The buyer did not pay for the equipment. Instead, the buyer purchased it on credit which is to say that the buyer promises to pay in the future. This is *the same as buying "on account."* *The promise to pay in the future (and similarly buying on account) indicates the buyer increases its liabilities.* Since assets and liabilities are both balance sheet accounts, this transaction affects only the balance sheet.
Carpenter Company pays employees' salaries. This transaction will immediately affect the
balance sheet, income statement, retained earnings statement, and cash flows statement. Solution: The company pays cash to its employees so the company's cash decreases. This reduces its total assets which affects the company's balance sheet. The company also records salaries expense. Expenses lower net income reported on the income statement, and expenses reduce retained earnings which affects the retained earnings statement and the balance sheet. Paying salaries is a cash outflow. It affect the cash flows statement.
An accountant has debited an asset account for $1,000 and credited a stockholders' equity account for $500. There is one missing part of the transaction. Which of the following can be the missing part of the transaction that needs to be recorded?
credit a different asset account for $500 Solution: The basic accounting equation is assets equal liabilities plus equity. It must stay in balance meaning total assets must equal total liabilities plus total stockholders' equity, and this relation must be maintained in every transaction. If a transaction debited assets by $1,000 then assets increased by $1,000. If that same transaction also credited an equity account by $500 then it increased equity by $500. The missing part of the transaction must cause assets to equal liabilities plus equity. Acceptable options include (1) decreasing (i.e., crediting) a different asset account for $500, (2) increasing (i.e., crediting) a liability for $500, and (3) increasing (i.e., crediting) a different equity account for $500.
